Concept of Deemed Speculation under Income Tax Act, 1961



Quick Summary
The Income Tax Act, 1961, defines speculative transactions as those settled without actual delivery of commodities or shares. However, Explanation to Section 73 introduces the concept of 'deemed speculation'. This means a company whose business involves buying and selling shares may be considered to be carrying on a speculative business, even if the transactions are delivery-based.

Dear Students/Readers,

Let us start with a small practical scenario

Surana & Surana Pvt. Ltd. has incurred a huge loss on trading in shares of other companies. The entire trading activity was delivery based. It seeks your opinion about the nature of such loss (whether speculative or non-speculative) under the following alternatives-

(i) Trading in shares is not the principle business of a company.
(ii) Trading in shares is the principle business of a company

Primary view

Apparently, one would come to the conclusion that the huge loss incurred by the Surana & Surana Pvt. Ltd. on the trading of shares is of non-speculative nature because the same is arising out of the share trading transactions which are delivery based. And this view is also supported by the definition of speculative transaction enumerated under section 43(5) of the Income Tax Act which reads as under:

"Speculative transaction means a transaction involving a contract for purchase and sale of commodities, including stocks and shares, which is periodically or ultimately settled other than by actual delivery or transfer of commodities or scrips."

Deemed Speculation: Income Tax Act 1961 Explained

Whether the above view is the correct view?

Before coming to any conclusion, one should also refer the explanation to section 73the Income Tax Act which reads as under:

Where any part (or whole) of the business of a company consists in the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

However, the above Explanation to section 73 does not apply to the following companies:

(1) Companies whose gross total income consists mainly of income which is chargeable under the heads 'Income from house property', 'Capital gains' and 'Income from other sources';

(2) Companies whose principle business is the business of banking;

(3) Companies whose principle business is the business of trading in share;

 

(4) Companies whose principle business is the business of granting loans and advances.

Final view on the nature of loss

Finally, what shall be the nature of loss incurred by the Surana&SuranaPvt. Ltd under different alternatives- Speculative or Non-speculative? Do post your answer in the comment box.

You can also listen to me

 
 

Happy Learning,
All the best.

CA/CMA Final Direct Tax Laws and International Taxation Course Pack for May 21 / Nov 21 / June 21 / Dec 21 attempt by CA Mehul Thakker

  • Enroll Direct Tax Laws and International Taxation (CA Final New DT) for May 21/Nov 21, Click Here
  • Enroll Direct Taxation and International Taxation (CMA Final DT) for June 21 /Dec 21, Click here

FAQ :

A speculative transaction is defined as one involving the purchase and sale of commodities, including stocks and shares, which is settled other than by actual delivery or transfer of the commodities or scrips.

Deemed speculation occurs when a company's business, in whole or part, involves the purchase and sale of shares of other companies. Such a company is considered to be carrying on a speculative business to the extent of its share trading activities, regardless of whether the transactions are delivery-based.

No, the explanation to Section 73 does not apply to companies whose gross total income mainly comes from 'Income from house property', 'Capital gains', or 'Income from other sources'. It also doesn't apply to companies whose principal business is banking, trading in shares, or granting loans and advances.

Not necessarily. While the basic definition of speculative transactions excludes delivery-based trades, the 'deemed speculation' rule under Section 73 can classify certain delivery-based share trading activities as speculative for companies involved in such business.




About the Author

Managing Partner

Mr. Mehul Thakker is a Fellow Member of the Institute of Chartered Accountants of India. He is a rank holder in the examinations conducted by ICAI. Expert in the field of Direct Taxes, and conducts advisory and appellate work. Authored three books onPractical aspects of Finance Act, 2003, 2008 and 2009 Authore ... Read more

Comments :

Related Articles


Loading


Popular Articles





CCI Pro

CCI Articles

submit article